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Will Troubles in Macau Spoil Gaming ETF Investments?

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After a long climb, Macau – one of the largest casino gaming destinations in the world –has started to lose favor among analysts. Several brokerage houses like Nomura Securities and Wells Fargo have slashed their expectations on 2014 revenue growth for Macau. Nomura Securities cut its revenue growth forecast from 17% to 14% while Wells Fargo reduced its revenue projection for the month of May from 14–16% to 10–14%.

What’s Behind the Short-Term Pessimism?

Per the analysts, credit crunch issues in mainland China, onslaught on illegal money transfers especially in VIP gaming from mainland China to Macau, and last but not the least, a broad-based slowdown in China have all hit the near-term revenue growth expectation for the gaming haven (read: China ETFs Tumbling on Fears of Credit Crunch).

Investors should note that the money fled to Macau’s VIP gaming from mainland China last year totaled about $1 trillion compounding China’s credit crisis. This has required some crackdown on the money-flow by the Chinese government, resulting in reduced VIP activities.

Further, a likely legalization of gambling in Japan is also posing threats to Macau’s industry-wide numbers as it will intensify the competition for Asian gamblers. Nomura noted that VIP gaming, which accounts for a major share of Macau gross gaming revenue, is normally low margin in nature. Thus, a soft gross revenue figure failed to trickle down to the bottom line.

Long-term is Still Bright

With all being said, long-term fundamentals for Macau look bright at this stage. First, as per Nomura, Macau casinos continue to switch their VIP gaming rooms to cater to the continuously growing mass market which is likely to generate double profitability than the VIP segment.

Thus, this conversion might result in a higher bottom line in the latter half of the year. In fact, Nomura Securities which reduced its forecast on Macau reiterated its individual forecasts on MGM, Wynn and Las Vegas Sands – the major casino gaming players of Macau.

Also, if one forgets the market, the underlying potential of these casino operators is quite high. Notably, Wynn Resorts and MGM Resorts are planning for an IPO to foray to into the Japanese market once the casino business is legalized there (read: WisdomTree Debuts 5 Hedged Japan Sector ETFs).

These companies are all set to construct multi-billion dollar integrated resorts. Basically, these companies seek to reproduce their successful model in Macau in the other un-tapped markets. The gambling resort industry in Japan could grow to $40 billion-a-year by 2025, as estimated by CLSA Ltd, implying that it would be Asia’s second largest gambling hub.

How to Play?

Investors can use this short-term hiccup, but keeping in mind the long-term potential, as a nice buying opportunity. Over the last one month, WYNN Resorts and MGM gained about 4.68% and 1.42% while Las Vegas Sands shed 3.57%. Notably, over the last three-month period, the trio shed in the range of 6.5% to 10.8%. Thus, investors can easily buy on the recent dip and capitalize on long-term prospects (read: Bet on Gaming ETF for Macau Mania, Superb Casino Earnings).

While single stock picks are always an option, a basket approach would be a prudent choice as it will help investors realize the benefits of the entire space through a single product and also allow investors to weather company-specific risks.

The fund looks to track the Market Vectors Global Gaming Index and provides investors direct exposure to the casino gaming market. The product has so far been overlooked by investors as is evident from its paltry volume of about 30,000 shares daily.

The fund has an AUM of $64 million which is invested in 46 holdings. The product is somewhat expensive as it charges 65 bps in fees per year which is on the higher end of the expense ratio prevailing in consumer discretionary ETFs.

All three abovementioned companies have found places in the top-10 holdings of the fund with a considerable share. Both the top companies – Sands China and Las Vegas Sands – have about 14% exposure in BJK.

MGM China holdings (about 5.22%) and MGM Resorts International (4.21%) call for more than 9% of the fund. Wynn Macau (3.9%) and Wynn Resorts Ltd (5.56%) also accounted for more than 8% of BJK.
BJK lost about 5.8% this year. The product holds a Zacks ETF rank of 3 or Hold rating with a High risk outlook.

PEJ in Focus

Though the fund has a small tilt toward the casino and gaming market with about 12% exposure, Las Vegas Sands (4.71%) and Wynn Resorts Ltd (4.60%) had places in the top 10 holdings of the ETF.

PEJ looks to track the dynamic Leisure and Entertainment Intellidex Index. This smart beta ETF focuses on criteria like price momentum, earnings momentum, quality, management action and value before including any stock in its portfolio (read: 'Dynamic' ETFs to Energize Your Portfolio).

The fund invests about $163 million in assets in 30 holdings. It charges a slightly higher fee of 63 basis points per year. PEJ lost about 4.25% this year but gained some footing over the past month. PEJ was up about 1.85% in the last one month. It currently carries a Zacks ETF Rank of 1 or Strong Buy rating with a Medium risk.

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